Introduction

Now that Donald Trump is president, the banking industry is well on its way to accomplishing what has been its top priority goal for years: upending Dodd-Frank, the massive regulatory law that emerged from the financial crisis.

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, two years after the worst economic downturn since the Great Depression vaporized about $14 trillion in wealth, according to the Federal Reserve. Taxpayers spent more than $300 billion to bail out the banks and investment firms behind the collapse, and they recovered sufficiently to repay almost all of that.

Dodd-Frank instituted safeguards designed to protect consumers and the economy from future crises. To that end, the law created the Consumer Financial Protection Bureau (CFPB), and fundamentally changed the way regulators watch over Wall Street by designating certain large institutions for regular scrutiny so that watchdogs weren’t caught off guard by bank failures. The banking lobby and its friends on Capitol Hill have complicated implementation by watering down some Dodd-Frank rules and delaying others, but the law survived mostly intact during President Barack Obama’s tenure.

That’s likely about to change. The Trump transition team website said it “will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage growth and job creation.” President Trump, while signing an executive order Monday to limit new regulations, told reporters he planned to “do a big number on Dodd-Frank.”

Members on the Republican-controlled House and Senate banking committees, many of whom received some of the heftiest sums of campaign donations from banks, have readied bills that would weaken many of the law’s protections; they argue the changes are necessary to reduce costly regulations and give consumers more choice in the financial services market. With that kind of influence, Wall Street will probably get much of what it wants.

Even one of the laws’ namesakes, former House Financial Services Chairman Barney Frank, D-Mass., said there is room to improve Dodd-Frank.

“We’re always changing something this big,” Frank said in an interview.

Some reforms, like changes to the CFPB, seem a certainty, mostly because they can be accomplished without legislation. Others will probably meet resistance, and a full repeal is unlikely, according to Frank. Dodd-Frank is “a popular law,” he said, and “very skillful people” such as Sens. Elizabeth Warren, D-Mass., and Sherrod Brown, D-Ohio, will strongly defend the legislation. In addition, Frank said, “I think Republicans who are up [for re-election] in 2018 are going to be reluctant” to dramatically weaken the law.

Even so, critics of altering Dodd-Frank believe the signs point to a regrettable return to a pre-recession era when large banks operated without significant regulatory oversight, said Marcus Stanley, policy director at Americans for Financial Reform, a coalition of civil rights, consumer and business groups that formed after the 2008 crisis.

“We had experience with Wall Street self-regulation prior to the financial crisis, and it did not work out well,” Stanley said. “When you let industry determine its own rules, it’s going to create more risks. The downside of those risks is going to be pushed to taxpayers and working families.”

‘Creating hope’

The Trump administration has a ready blueprint for dismantling Dodd-Frank. It’s called the Financial Choice Act.

While the bill was introduced just last year, the ideas behind it aren’t new. The Choice Act includes language from 40 previous bills that made it to the House floor but stopped short of becoming law. One bill would have exempted manufactured-home retailers from the law, exposing borrowers to costly loans, the Obama administration argued. Another expanded what kinds of up-front costs (called points and fees) could be considered a so-called qualified mortgage, which are eligible to be insured by the federal government. That change would have eroded consumer protections, the Obama White House said.

The Choice Act wouldn’t completely repeal Dodd-Frank, but rather change those provisions the banking industry particularly dislikes: Regulators’ “orderly liquidation authority” for winding down failing banks, a “stress test” system banks consider opaque and burdensome, and the government’s discretion in deciding what institutions warrant heightened scrutiny, among others.

Doing away with Dodd-Frank completely would be impossible without convincing Senate moderates. And scrapping it would be costly for industry in its own way, because institutions have already adapted to many of the laws’ changes. Some of those changes have actually improved business, according to a study by the consulting firm Accenture. Almost three-quarters of the 132 business executives surveyed by the firm in 2012 said “Dodd-Frank will increase their company’s profitability over the lifetime of the program.”

Still, the Choice Act — which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs — puts major components of Dodd-Frank on the chopping block. The most notable Choice Act provision is a so-called regulatory “off ramp,” which would free an institution from regulatory scrutiny if it holds 10 percent of its assets in reserve to cover potential losses — regardless of the bank’s size or the complexity of its business.

As it stands, Dodd-Frank creates tiered regulation for financial institutions and oversees large non-banking financial institutions such as giant insurance firms. The largest banks must complete “stress tests” to ensure they can withstand an economic downturn and have a plan for liquidation in the event of a major failure.

The new one-size-fits-all regulation would make compliance simpler and be less costly for banks to comply with, supporters say. But Dodd-Frank backers and regulators doubt whether the 10-percent-reserve cushion would be large enough to prevent another crisis should some of the largest U.S. banks fail.

Federal Reserve Gov. Daniel Tarullo said at a Wall Street Journal event in July that the “10 percent number would have to be substantially higher to have regulators comfortable that there were not substantial safety and soundness considerations.”

Reviews of Dodd-Frank have found it has had a positive effect on bank safety and the economy, with few significant downsides. A 2015 Government Accountability Office study found an “increase in compliance burden” for smaller banks and credit unions but also concluded that “the act has had little effect on the funding costs of these companies and may be associated with improvements in some measures of their safety and soundness.”

Another GAO report issued late last year that the regulatory structure that Dodd-Frank builds upon “has contributed to the overall growth and stability in the U.S. economy.” Auditors did find “inefficiencies in regulatory processes” due to overlap and fragmentation that predated Dodd-Frank and are still persistent in the regulatory structure.

Then Rep. Mike Pence, R-Ind., who called Dodd-Frank a job killer, talks with Rep. Jeb Hensarling, R-Texas, in the Rotunda on Capitol Hill in 2011.

Economic stability and improved bank safety haven’t stopped supporters of the Choice Act from moving forward with tearing down Dodd-Frank. The bill was introduced in September by Rep. Jeb Hensarling, a Texas Republican who is a deregulation crusader and friend of Vice President Mike Pence; Pence represented Indiana in the House from 2001 to 2013 and was a critic of Dodd-Frank when the law passed in 2010.

“This so-called financial reform bill will kill jobs,” Pence said in a statement days after Dodd-Frank passed.

Hensarling managed Pence’s unsuccessful campaign for House minority leader in 2006. When Pence left Congress to become governor of Indiana, Hensarling invoked scripture in a farewell speech from the House floor.

“Mike Pence is my friend that sticketh closer than a brother,” Hensarling said.

In November, Hensarling told members of the Exchequer Club in Washington, a group of professionals from trade associations, regulatory agencies and the financial industry, that “there has been a fairly constant dialogue with the Trump transition team about the Choice Act.”

Hensarling is a member of the so-called “banking caucus,” a group of lawmakers the Center for Public Integrity identified in 2014 as having close ties to the financial industry and having received some of the largest campaign contributions from banks. Along with Hensarling, three of the five Republican cosponsors of the Choice Act also were members of the banking caucus: Sean Duffy from Wisconsin, Blaine Luetkemeyer from Missouri and Scott Garrett from New Jersey, who lost his 2016 re-election bid. Two other sponsors of the bill were Reps. Bill Huizenga, R-Mich., and now-retired Randy Neugebauer, R-Texas.

As chairman of the House Financial Services Committee, Hensarling is the ringleader. For years, he has tried to unwind Dodd-Frank and end what he calls the “regulatory waterboarding” of the financial sector.

“I will not rest until Dodd-Frank is ripped out by its roots and tossed on the trash heap of history,” Hensarling told American Bankers Association members last year.

Over the course of their careers, Hensarling and the three cosponsors who are included in the banking caucus have raised more than $2.8 million from commercial banks, $4 million from securities and investment firms, and $3 million from insurance companies, according to the Center for Responsive Politics.

The financial sector is Hensarling’s top campaign donor. Since first coming to Congress in 2002, commercial banks have given Hensarling more than $1.35 million in contributions, just behind the insurance industry ($1.4 million) and the securities and investment industry ($1.41 million), according to the Center for Responsive Politics. Hensarling’s take from the financial industry dwarfs his colleagues. On average, active House members have received about $162,000 from the financial sector.

Among Hensarling’s top donors are the nation’s two-largest banks — JPMorgan Chase & Co. and Bank of America Corp. — and the fourth largest, Wells Fargo & Co. Commercial banks gave $390,150 to Hensarling’s campaign committee and leadership PAC for his 2016 re-election campaign, behind only the insurance industry ($430,850) and securities and investment firms ($414,945).

Hensarling’s office confirmed he plans to re-introduce the Choice Act in this Congress.

Financial institutions gave similar amounts to the other banking caucus members who sponsored the Choice Act. In 2016, insurance, commercial banks, and securities and investment firms combined to contribute $658,754 to Duffy, $899,077 to Luetkemeyer and $571,755 to Garrett.

Huizenga, another sponsor of the bill, has received over $1 million from the financial industry since he was first elected in 2009, and sponsor Neugebauer, who retired from Congress last year, collected over $1.8 million since 2001.

Waiting in the Senate is Sen. Mike Crapo, R-Idaho, who took over the Senate Banking Committee this session. He has collected over $3 million from the financial industry since first coming to Congress in 1991, including top donor JPMorgan Chase.

One of the trade groups that has given mightily to the banking caucus is the Consumer Bankers Association, which counts Bank of America, Wells Fargo, Citigroup and Chase as members. The group gave more than $400,000 to political campaigns in 2016 according to data collected from the Center for Responsive Politics.

The Choice Act presents “a chance to look at [Dodd-Frank] to ensure it will be good for banks and consumers,” said Richard Hunt, president and chief executive officer of the association.

Financial Services Committee Ranking Member Maxine Waters, D-Calif., is less enthused. “This bill is so bad that it simply cannot be fixed,” she said during a committee session discussing the bill. “It’s clear that this is a rushed, partisan messaging tool.”

‘Sea change at the CFPB’

The Choice Act also targets the Consumer Financial Protection Bureau, which Dodd-Frank established to protect consumers from “unfair, deceptive or abusive practices” of the financial sector, according to the law.

But Hensarling believes the agency is an example of government run amok, claiming the CFPB has “infringed on the economic freedoms of consumers.”

That sentiment, along with Trump’s election win, “will result in a sea change at the CFPB,” said Alan Kaplinsky, who leads the Consumer Financial Services Group at the law firm Ballard Spahr. “There’s a lot of discontent among the companies that are regulated and supervised and who have become the target of the CFPB.”

The most likely change would replace the CFPB’s individual director, appointed by the president and confirmed by the Senate, with a five-member commission that would have three Republicans during the Trump administration. The panel would be subject to congressional oversight and appropriations. Bank executives and their allies in Congress say the agency’s current director — former Ohio Attorney General Richard Cordray, a controversial Obama appointment initially made during a congressional recess and confirmed by the Senate only 18 months later — has too much power and is unaccountable to Congress.

CFPB crackdowns on practices the agency deems “abusive” have led some Republicans to charge that the agency is straying from enforcement into advocacy. When the CFPB announced new rules regarding the payday-loan industry, which has been charged with targeting low-income individuals with high-interest loans that can trap them in long-term debt, Hensarling fired back at Cordray.

“Accountable to no one, he alone decides for all Americans whether they can take out a small-dollar loan to meet emergency needs,” Hensarling said in a press release.

The proposed changes to the CFPB, which include repealing the CFPB’s authority to ban products and services that regulators deem abusive, are aimed at reducing what some Congress members believe are controversial actions, like the payday-lending rules.

But the agency still should enforce the law under a Republican-led CFPB, Kaplinsky said. “There are plenty of clear cut violations of law that [the CFPB] can target without taking extreme positions where the industry is caught off guard and surprised,” he said.

Sens. Mike Lee, R-Utah, and Ben Sasse, R-Neb., wrote a letter to Pence this month urging the administration to fire Cordray. Neugebauer, one of the sponsors of the Choice Act, is said to be Trump’s choice to head the agency.

Proponents of reform also say a five-person commission would allow for more industry input in CFPB decision making. Changing the CFPB’s funding source from the Federal Reserve to congressional appropriations also would make the agency more accountable by placing it under the supervision of elected officials in Congress.

Or, the change could inject politics into the agency, say CFPB supporters.

“What we know about commissions is they tend to be gridlocked,” said Yana Miles, policy counsel at the Center for Responsible Lending, a nonprofit research organization that advocates for fair lending practices.

A divided commission may prevent the agency from quickly responding to abusive practices by financial institutions, critics of the proposed structure argue.

“It wasn’t that long ago that we saw the waves of predatory lending that nearly destroyed our economy,” Miles said. The CFPB “is the one thing out there standing between consumers and the wild wild west of the days leading up to the crisis.”

CFPB critics, nevertheless, have the courts on their side, so far. A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit ruled last year that the agency’s single-director structure is unconstitutional. The CFPB has asked the full D.C. Circuit to rehear the case.

Supporters say the CFPB is accountable to consumers, as illustrated by a record of punishing banks’ wrongdoing. Since opening its doors in 2010, CFPB actions have resulted in more than $11 billion in compensation or debt reduction to consumers. Among its major cases:

One of its most high-profile decisions came last year, when the CFPB fined Wells Fargo $100 million for opening accounts without customers’ consent, with another $35 million going to the Office of the Comptroller of the Currency and $50 million to the City and County of Los Angeles.

The CFPB brought complaints in 2014 against Corinthian Colleges, a for-profit college accused of overselling the employability of its graduates, and ITT Educational Services, a for-profit institution accused of predatory student lending.

On Jan. 18, the CFPB announced a lawsuit against Navient Corp., the nation’s largest student-loan servicer, for “systematically and illegally failing borrowers at every stage of repayment.”

The CFPB relied partly on its mandate to prevent abusive practices to pursue the Wells Fargo case, Miles said. Under changes in the Choice Act, “a Wells Fargo situation could pop up again and it would either not be addressed or would take a much longer time to get to it,” Miles said.

The Financial Choice Act would relax or remove many of the protections on the financial system created by Dodd–Frank. The possibility of its passage has greatly increased because Donald Trump was elected president. Experts say the bill will face a partisan battle in Congress, but the measure provides a preview of which Dodd-Frank rules may be weakened or gutted. The Choice Act provisions below were included when the bill was introduced during the 2015-2016 session of Congress.

An “off ramp” for regulations

What Dodd-Frank does: The law placed restrictions on some of the risky behaviors that led Wall Street to the 2008 financial crisis. The rules are meant to prevent another major collapse and to protect consumers from abuse.

What the Choice Act does: The act would allow financial institutions to avoid many of these rules. If financial institutions keep 10 percent of their assets to absorb potential losses, they would be exempt from increased scrutiny under Dodd-Frank, regardless of size.

“Too Big to Fail”

What Dodd-Frank does: The law provides a way for the government to wind down failing banks that are “too big to fail.” The bank would go through a government-led bankruptcy designed to prevent the damage a big bank’s failure may otherwise inflict on the financial system.

What the Choice Act does: The bill would replace these safeguards by adding a new chapter to the bankruptcy code for use by large financial institutions.

It also would repeal Dodd-Frank’s Volcker Rule, which now prohibits banks with access to the Federal Deposit Insurance Fund from making certain risky investments.

Consumer protection

What Dodd-Frank does: Dodd-Frank created the Consumer Financial Protection Bureau, a government agency with a mandate to protect consumers from “deceptive, unfair and abusive” practices. It polices how financial products, such as mortgages, are sold to consumers.

What the Choice Act does: The act would make structural changes, such as replacing the CFPB’s single director with a 5-member commission, which under a Trump administration would be controlled by Republicans. It also would substitute the CFPB’s current funding, from the Federal Reserve, with a budget approved by Congress, giving lawmakers more control over what the agency does. New rules issued by the CFPB would be subject to a cost-benefit analysis and other changes would allow the industry to more easily fight new regulations.

The act would remove the CFPB’s ability to ban products or services it deems “abusive” and repeals the agency’s latest rulings on high-interest lending and forced arbitration.

Also repealed would be the Labor Department’s “fiduciary rule,” which limits what financial services can be sold by retirement advisers. Currently, retirement advice sold by investors may involve conflicts of interest, which cost consumers an estimated $17 billion a year by some estimates.

Wall Street accountability

What Dodd-Frank does: The law created a panel of regulators from various agencies called the Financial Stability Oversight Council, which monitors too-big-to-fail banks. It also gave the council the power to oversee companies that weren’t banks, but which had become important to the financial system’s health. Among such companies is AIG, an insurance agency which backed many of the bad bets big banks made before the recession, and which was the recipient of the largest public bailout in history following the financial crisis.

The law also placed controls on short-term bonuses for executives to prevent Wall Street bosses from collecting huge bonuses for deals that later fail.

What the Choice Act does: The act would remove the council’s ability to single out companies such as AIG for increased regulation.

The bill would increase the financial penalties for institutions caught breaking the law but would remove many of the provisions Dodd-Frank enacted to hold individual bank officials accountable.

The act would remove the limits on bank executive bonuses. It also would limit “clawback” provisions that can undo bonuses based on shady accounting practices.

Not so fast

Changing the CFPB may not be so easy, despite Republicans’ control of Congress and a new White House occupant they see as an ally. Sen. Warren, who spearheaded the creation of the agency, warned Hensarling and his colleagues about the CFPB’s importance during a November conference of the Wall Street Journal’s CEO council, a group of influential business leaders.

“The Consumer Financial Protection Bureau is doing the people’s business. And it has its own fan club out there: It’s got the people it’s working for,” Warren said. “You try to take the legs out from underneath the Consumer Financial Protection Bureau — I think that’s not only a problem for Donald Trump and for the Republicans. I think this is something that the American people will say ‘enough.’”

Indeed, 56 percent of Trump voters want the CFPB either left alone (41 percent) or expanded (15 percent), according to a Morning Consult poll conducted in December. Likewise, 71 percent of Republican and Democratic voters said they supported the CFPB, according to a 2016 poll by Lake Research Partners.

In addition, Trump, himself a highly-paid business mogul, made Wall Street excess one of the boogeymen of his campaign.

He told CBS in a 2015 interview that CEO pay on Wall Street was “a total and complete joke.” Dodd-Frank instituted a policy known as “clawback,” which allows regulators to penalize executives who take home bonuses based on accounting fraud, and implemented say-on-pay rules designed to allow employees to have more input in the compensation of their bosses on Wall Street.

Trump said hedge-fund managers were “getting away with murder” on taxes and talked of closing the carried interest loophole that allows income from hedge-fund profits to be taxed at a lower rate than most forms of income.

He and the Republican platform called for a new Glass-Steagall Act to separate banks’ risky investments from customer’s deposits, something Warren and Sen. John McCain, R-Ariz., proposed in 2015. Trump’s nominee for Treasury Department secretary, Steven Mnuchin, offered tentative support for “a 21st-century version” of Glass-Steagall during his confirmation hearing.

Still, Trump’s position, like on so many others, can change. A look at who has run his transition teams and his appointments may signal where policy is really headed. And by that measure, the future doesn’t look promising for Dodd-Frank.

Trump’s transition team on financial regulation has been led by Paul Atkins, CEO of the financial services consulting firm Patomak Global Partners. Atkins is a former commissioner of the Securities and Exchange Commission and a deregulation advocate who called Dodd-Frank a “calamity” in 2011 when testifying before the Senate Committee on Banking, Housing and Urban Affairs.

A Trump administration also will include financiers. Mnuchin, senior adviser Steve Bannon and director of the National Economic Council Gary Cohn all currently or previously worked for Goldman Sachs. Commerce Department Secretary nominee Wilbur Ross is a billionaire investor who in 2010 called “government intervention” one of the biggest problem for investors.

In May, Trump told Reuters he would release a plan to overhaul Dodd-Frank.

“Dodd-Frank has made it impossible for bankers to function,” Trump said at the time, even as banks have reported increasing profits year over year since the passage of Dodd-Frank.

Trump’s plan has not yet been released.

Clarification, 2:20 p.m., Feb., 1 2017: An earlier version of this story attributed the “growth and stability in the U.S. economy” to Dodd-Frank, but the GAO report concluded the overall financial regulatory structure that Dodd-Frank built on contributed to the growth and stability.